Arthur Levitt and PCAOB

The Trump Administration has proposed putting the Public Company Accounting Oversight Board (or as we called it in the early days, “Peek-a-Boo”) under the SEC. Arthur Levitt, a former head of the SEC who was effective in exposing accounting mumbo jumbo in financial statements, believes it is a mistake to shuffle the function over to the SEC. Mr. Levitt says:

1. The SEC is slow
2. Elimination of PCAOB would undermine confidence in the audit profession

The Barometer concedes the first point to Mr. Levitt. The SEC is slow, except when it comes to Musk Tweets. That sounds like a treat for rodents, but it would be the SEC jumping on Elon Musk for his defiance of the agency. Not that a CEO trashing the SEC is a good thing, but it does seem to be a timeliness focus for the agency.

However, elimination of PCAOB would undermine confidence in the audit profession?

Let’s recap what the audit profession has been able to do all on its own, and all with the mighty PCAOB in place:

Audit quality has not improved much despite PCAOB’ ratings (its minimal sanctions have not helped the cause)
PwC got the wrong envelope for best picture in 2017 — somehow the firm mixed up the envelope — how are you going to do goodwill valuation and ACRS if you can’t see the difference between “La-La Land” and “Moonlight”?
PwC’s tax strategy at Caterpillar netted that company early-morning IRS raids at its facilities
A KPMG partner entered a guilty plea to feeding a friend insider information on clients so that the client could do some advance trading (but he got a Rolex in exchange)
PCAOB fed information to KPMG’s audit folks, turned state’s evidence, and one partner was convicted of collusion with PCAOB (and despite KPMG being given a heads-up on which companies’ audits PCAOB would be examining, KPMG’s audit quality was not affected — there some crackerjack work)
Ernst & Young is now under criminal investigation for allegedly being fed bid information by management so that the independent audit committee of the company board would pick EY for its auditor
KPMG was the auditor for collapsed New Century
PriceWaterhouseCoopers (PwC — and this acronym at least matches the letters in the words) settled for $41.9 million for overfilling federal agencies for its work
PwC, EY, and KPMG settled with the federal government for overbilling travel expenses to the government

The list could go on — and that it just the most recent stuff. What could possibly go wrong with this group handling audits of publicly traded companies?

The semi-private PCAOB has not proven itself to be a fierce watchdog. Perhaps its resources would be better used in an existing regulatory framework such as the SEC. The again the SEC missed both the Madoff and Stanford Securities Ponzi schemes. You can’t relate ethics. Fundamentally, the strength of audit firms is dependent on the ethics and backbones of auditors. From watching out for conflicts to refusing to back down when clients pressure them on issues, the critical juncture lies in auditors’ ability to call ’em as they see ’em, not as the client would like to have it. PCAOB was never ever to move the needle on that metric.

About mmjdiary

Professor Marianne Jennings is an emeritus professor of legal and ethical studies from the W.P. Carey School of Business at Arizona State University, retiring in 2011 after 35 years of teaching undergraduate and graduate courses in ethics and the legal environment of business. During her tenure at ASU, she served as director of the Joan and David Lincoln Center for Applied Ethics from 1995-1999. In 2006, she was appointed faculty director for the W.P. Carey Executive MBA Program. She has done consulting work for businesses and professional groups including AICPA, Boeing, Dial Corporation, Edward Jones, Mattel, Motorola, CFA Institute, Southern California Edison, the Institute of Internal Auditors, AIMR, DuPont, AES, Blue Cross Blue Shield, Motorola, Hy-Vee Foods, IBM, Bell Helicopter, Amgen, Raytheon, and VIAD. The sixth edition of her textbook, Case Studies in Business Ethics, was published in February 2011. The ninth edition of her textbook, Business: lts Legal, Ethical and Global Environment was published in January 2011. The 23rd edition of her book, Business Law: Principles and Cases, will be published in January 2013. The tenth edition of her book, Real Estate Law, will also be published in January 2013. Her book, A Business Tale: A Story of Ethics, Choices, Success, and a Very Large Rabbit, a fable about business ethics, was chosen by Library Journal in 2004 as its business book of the year. A Business Tale was also a finalist for two other literary awards for 2004. In 2000 her book on corporate governance was published by the New York Times MBA Pocket Series. Her book on long-term success, Building a Business Through Good Times and Bad: Lessons from Fifteen Companies, Each With a Century of Dividends, was published in October 2002 and has been used by Booz, Allen, Hamilton for its work on business longevity. Her latest book, The Seven Signs of Ethical Collapse was published by St. Martin’s Press in July 2006 and has been a finalist for two book awards. Her weekly columns are syndicated around the country, and her work has appeared in the Wall Street Journal, the Chicago Tribune, the New York Times, Washington Post, and the Reader's Digest. A collection of her essays, Nobody Fixes Real Carrot Sticks Anymore, first published in 1994 is still being published. She has been a commentator on business issues on All Things Considered for National Public Radio. She has served on four boards of directors, including Arizona Public Service (1987-2000), Zealous Capital Corporation, and the Center for Children with Chronic Illness and Disability at the University of Minnesota. She was appointed to the board of advisors for the Institute of Nuclear Power Operators in 2004 and served on the board of trustees for Think Arizona, a public policy think tank. She has appeared on CNBC, CBS This Morning, the Today Show, and CBS Evening News. In 2010 she was named one of the Top 100 Thought Leaders in Business Ethics by Trust Across America. Her books have been translated into four different languages. She received the British Emerald award for authoring one of their top 50 articles in management publications, chosen from over 15,000 articles. Personal: Married since 1976 to Terry H. Jennings, Maricopa County Attorney’s Office Deputy County Attorney; five children: Sarah, Sam, and John, and the late Claire and Hannah Jennings.
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